The Cyclical Nature of Dollar Price Action

I have often written and commented on the importance of understanding the cyclical nature

of the currency markets. That often sees micro trends unfold or reverse from one quarter to

the next. Over the years that has been most evident with the dollar. However, it is certainly

not a consistent theme by any means. Take this year for example, where the dollar has not

always gyrated strictly on a quarter by quarter basis.

If you look at the simple chart of the dollar’s performance this year you can see how that

has played out. This chart tracks the performance of the USD index which is a broad based

measure of the US currency’s performance as weighted against a basket of counterpart

currencies. The main one is the EUR, with around a 57% weighting within that basket. The

other major components within that basket are the JPY, CHF, GBP and CAD.

So, as you can see the USD index rose in the first quarter following a modest sell off in the

final quarter of 2018. The rebound in Q1 continued into the second quarter. That was then

followed by a sharp relapse right at the end of Q2. The move lower at the end of Q2

culminated with a brief break below the 200 day moving average, right at the end of June.

That moving average is identified by the yellow line on the chart. The index then rebounded

again, breaking back above the 200 DMA, rising steadily throughout Q3.

As you can see, the peak of the move in Q3 came right at the end of September when the

index briefly lifted above 99, peaking exactly on 30th of the month. Uncanny perhaps? Well,

since then the index has fallen back quite sharply as Q4 has unfolded. The price briefly

dipped below the 200 day moving average again last month, only to rebound back above it

again. However, on Friday the price dropped below it again, to close for the week below the

200 DMA for a second time. The close last Friday was set at 97.24. The 200 day moving

average is today, largely unchanged from where it stood on Friday and as of this morning

stands at 97.46.

So, with just a little under two months to go before the year is out, you can see that the

scene is now set for the USD index to continue to lose ground into the end of the final

quarter of 2019. Whilst that looks increasingly likely, it is not at all guaranteed. This is largely

due to the fundamental reasons why the USD has been strong this year- because the

European economy is structurally so weak. The latest EU PMI data this morning, whilst

slightly better than expected, is still very much endorsing that point.

However, what I am trying to convey here is the clear evidence that once again the dollar’s

performance over any one given year is invariably characterized by these quarterly shifts in

the price action. As I earlier noted this is a phenomenon that I can safely say has

characterized USD trading over each and any year for as long as I can remember, and that is

an awful long time! What is also clear, is that unless anything fundamentally changes in

Europe between now and the New Year, then the lower the USD falls back towards the end

of December, the greater the chances of a Q1 rebound in 2020.

Important economic releases and events due This Week

05/11- 3.30am Australia- RBA Monetary Policy Decision

(Consensus- 0.75% Benchmark Rate Unchanged)

05/11- 9.30am UK October Services PMI

05/11- 3.00pm US October Non Manufacturing ISM Index

05/11- 9.45pm New Zealand Q3 Unemployment Report

06/11- 10am Eurozone September Retail Sales

07/11- 1.30am China October Foreign Currency Reserves

07/11- 8.00am Swiss October Foreign Currency Reserves

07/11- 9.00am ECB publishes Economic Bulletin

07/11- 10.00am EU Commission Publishes Economic Forecasts

07/11- 12.00pm Bank of England Monetary Policy Decision

(Consensus- 0.75% Base Rate Unchanged)

07/11- 8.00pm US September Consumer Credit

07/11- 11.50pm Japan October Foreign Currency Reserves

08/11- 3.00pm US University of Michigan November Consumer

Sentiment Index